The Underwriting Challenges Facing P.S.V. Insurers in Kenya

Topics: Rational choice theory, Utility, Economics Pages: 69 (22799 words) Published: November 22, 2012
Rational Choice Theory: An Overview


Steven L. Green
Professor of Economics and Statistics
Chair, Department of Economics
Baylor University

Prepared for the
Baylor University Faculty Development Seminar
on Rational Choice Theory

May 2002

© 2002, Steven L. Green

It has been said that democracy is the worst form of government except all the others that have been tried.

-Winston Churchill

It seems easy to accept that rationality involves many features that cannot be summarized in terms of some straightforward formula, such as binary consistency. But this recognition does not immediately lead to alternative characterizations that might be regarded as satisfactory, even though the inadequacies of the traditional assumptions of rational behaviour standardly used in economic theory have become hard to deny. It will not be an easy task to find replacements for the standard assumptions of rational behaviour ... that can be found in the traditional economic literature, both because the identified deficiencies have been seen as calling for rather divergent remedies, and also because there is little hope of finding an alternative assumption structure that will be as simple and usable as the traditional assumptions of self-interest maximization, or of consistency of choice.

- Amartya Sen (1990, p. 206)


Rational Choice Theory is an approach used by social scientists to understand human behavior. The approach has long been the dominant paradigm in economics, but in recent decades it has become more widely used in other disciplines such as Sociology, Political Science, and Anthropology. This spread of the rational choice approach beyond conventional economic issues is discussed by Becker (1976), Radnitzky and Bernholz (1987), Hogarth and Reder (1987), Swedberg (1990), and Green and Shapiro (1996).

The main purpose of this paper is to provide an overview of rational choice theory for the non-specialist. I first outline the basic assumptions of the rational choice approach, then I provide several examples of its use. I have chosen my examples to illustrate how widely the rational choice method has been applied.

In the paper I also discuss some ideas as to why the rational choice approach has become more prevalent in many disciplines in recent years. One idea is that the rational choice approach tends to provide opportunities for the novel confirmation of theories. I argue that these opportunities are the result primarily of the mathematical nature of the approach.

I then consider several issues raised by rational choice theory. First, I compare the limited meaning of “rationality” in rational choice theory with the more general definitions of the term use by philosophers. Second, I describe some of the main criticisms that have been levied against the rational choice approach. Third, I consider the limitations of rational choice models as guides to public policy. Fourth, I review some Christian perspectives on the rational choice appraoch.

I end the paper by outlining three sets of questions I would like us to discuss in the faculty development seminar.
Before I proceed, an apology and a caveat are in order. I apologize for the length of this paper. The British publisher Lord Beaverbrook once apologized to a friend for sending a five- page letter, saying he did not have time to write a one-page letter. I have the same sentiment here.

The caveat is that my discussion of the rational choice theory in this paper is necessarily simplistic, so the reader should not take it as definitive. If some element of the theory seems suspect in some way, there will nearly always be an advanced version of the theory published somewhere that is more subtle and nuanced. Most statements in this paper are subject to qualification along many lines, so the reader should view what I present here keeping...
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